Why do concert ticket prices change?

Why do concert ticket prices change?

In this article, Steven Proud examines the concept of dynamic pricing through the lens of concert tickets

 

Have you ever noticed that when shopping online the prices of goods seem to change? For example, the cost of train tickets might change, depending on whether you are booking a long way in advance, or for the same journey tomorrow. Sometimes, when buying goods online, you may even see a different price from your friend, or even a different price depending on the browser that you use.

This sort of variable pricing is known as dynamic pricing, and is a way that producers and retailers can try to extract increased surplus from consumers. One of the first times that dynamic pricing came to public attention was in the year 2000, when Amazon trialled a pricing tool across a range of DVDs, leading to different customers being presented with different prices for the same titles. At the time, this led to significant complaints from consumers, and refunds were offered to those who had faced higher prices. Nevertheless, over the last two decades, there has been a growth in the use of dynamic pricing across a range of goods and services, with the ultimate aim of increasing profits for retailers.

The market for concert tickets

In 2022, the online ticket retailer, Ticketmaster, introduced dynamic pricing that reacted to observed demand, and increased (or decreased) prices accordingly.

Suppose that you are a fan of Taylor Swift — while you could go to see a tribute act, because there is only one Taylor Swift, there is no competition. The only competition that might exist would be if, for instance, you were only able to afford to attend one concert, and you had to choose between Taylor Swift and Harry Styles. These events are not perfect substitutes and have their own distinct characteristics. So, at best, the market for concert tickets follows a monopolistically competitive model, but because retailers like Ticketmaster have significant market power, we will analyse these as a monopolist.

In a standard model of monopoly, firms are able to take advantage of their market power to restrict quantity produced, in order to sell their goods for a higher price and to maximise their profits. They will do this by selling up until the point that the marginal revenue that they receive for an additional ticket is equal to the marginal cost of providing one additional ticket.

This is represented in Figure 1, where the profit-maximising quantity (where marginal revenue is equal to marginal cost, MR = MC) is represented as qM. The price that the firm charges is then determined by the level of demand to clear the market, which in this model is pM. The profit to the monopolist is then represented as the difference between what they receive for the good, and the average cost (AC) of producing qMunits of the good (cM). So, the monopolist’s profit here is equal to (pM–cM) × qM.

Why is dynamic pricing desirable?

The first problem that a retailer has is that when tickets are placed on sale at a fixed price, in reality the promoter does not know with any certainty what the true demand for the tickets (and hence the marginal revenue) will be. As a result, they will not know what the optimal (profit-maximising) price will be to set.

Many of us will have had the experience of trying to buy tickets to a popular event, only to find the official sellers have sold out within hours of them going on sale, and then those same tickets appear on secondary selling sites (such as eBay) within minutes for a much higher price.

By introducing dynamic pricing, if the demand for tickets is significantly higher than the quantity available, prices can rise until such a point that overall demand is equal to supply. While the impact of this is to increase the price that consumers have to pay, it also has the effect of revealing what the actual market price should be for those tickets. This allows ticket retailers (and hence artists) to maximise the profits from their concerts.

Of course, Figure 1 represents a very naïve model of the concert ticket market. In reality, the quantity will be restricted not by the intersection of MR = MC, but instead by the capacity of the venue(s) that have been booked for the concert tour. Just as dynamic pricing can allow prices to rise, if demand is less than the number of tickets available, the retailer can lower prices to ensure that all tickets are sold.

Can monopolists go any further?

Thinking back to Figure 1, the monopolist was not able to extract all of the potential surplus available to them. Consumers were able to extract some consumer surplus, and some potential welfare was lost to society through a deadweight loss.

The first question for a monopolist who wishes to increase their profits, then, is whether they can use their market power to transform the consumer surplus into profit. To illustrate how they might do this, we need to think about the meaning of the demand curve, which represents the maximum willingness to pay of individuals within the market. If the monopolist can identify each consumer’s willingness to pay, they could try to maximise profits by charging each consumer this amount.

Modelling the problem

Let’s consider a simple model in which there are five consumers in the market, and the marginal cost of providing an additional ticket is equal to £25 (and zero fixed costs). The willingness to pay for the five consumers is illustrated in Table 1. We can now examine the profits that the monopolist could make by choosing different prices.

If the firm sets a price of £100, only Ahmed would be willing to buy the good, and one ticket would be sold, leading to a profit of £75. If the price were reduced to £80, then both Ahmed and Beatrice would be willing to buy the tickets. However, in a single price monopoly, the price would have been reduced for both Ahmed and Beatrice to £80, and the profit would be £110.

However, if the price were lowered to £60, now Ahmed, Beatrice and Charlie would be willing to purchase tickets, but with a fixed price of £60. Revenues would be £180, and costs £75, leading to a profit of £105. Under a single price monopoly, the ticket seller would set a price of £80, and would make profits of £110.

First-degree price discrimination

Suppose that the ticket seller knew each individual’s willingness to pay. In this case, they could offer each consumer a price equal to their maximum willingness to pay, so Ahmed would be charged £100, Beatrice £80, and so on. The only consumer who wouldn’t be offered a ticket would be Evie, as her willingness to pay is less than the marginal cost of providing her ticket. This would lead to revenues of £280, with total costs equal to £100, and total profits equal to £180. This is illustrated in Figure 2.

By charging each consumer their maximum willingness to pay, the monopolist is able to transform all of the potential surplus into producer surplus (and profit). This sort of pricing strategy is often referred to as first-degree price discrimination.

This form of price discrimination requires a firm to know a lot about each of their potential consumers’ willingness to pay. It also requires there to be no ability of consumers to sell on their purchase (this is known as a no arbitrage possibility).

In the example above, David would have been charged £40 for his ticket, but he could then decide to try to make a profit himself, by selling his ticket to Ahmed for £99. Ahmed would be happy, because he could buy a ticket cheaper than the ticketseller is offering, and David would be happy, because he would have an extra £55 in his pocket.

Because of the amount of information needed, and the difficulty of preventing re-sale, this form of first-degree price discrimination is rare.

Other forms of dynamic pricing

While it is unlikely that ticket sellers will be able to exactly observe people’s willingness to pay for concert tickets, they may still be able to extract some of the surplus by recognising that different groups within the market might have different willingness to pay.

For example, lots of firms offer student discounts. This isn’t normally a case of a firm being benevolent towards students but is a recognition that students often don’t have the same disposable income as someone of the same age in full-time employment, and so their willingness to pay will be lower. As such, a lower price can be charged, with the aim of increasing the amount of profit.

This same sort of strategy could be employed through a dynamic pricing strategy for concert tickets. If ticket retailers start by selling tickets at very high prices — since they don’t know how many fans will be willing to pay those high prices — those with the highest demand may purchase tickets at those high prices, simply to avoid the risk that tickets sell out.

If, however, the tickets have not sold out, then the firm could reduce the price to sell tickets to consumers with a lower demand. This is illustrated in Figure 3. By adopting a dynamic pricing strategy, the firm is able to increase its surplus.

Of course, this strategy will only work if the consumers do not know how many other consumers will be willing to purchase tickets at the initial high price. If a consumer has a strong belief that the demand will be lower than the number of tickets available, then they would be rational to wait until prices fall. However, if there is any uncertainty, a risk-averse concert-goer may be willing to pay a higher price to ensure that they gain a ticket with certainty, rather than waiting, and facing the risk of not being able to attend the concert.

Summary

Dynamic pricing is a method that allows monopolists, and firms with significant market power, the opportunity to increase the amount of surplus that they extract. A simple form of dynamic pricing allows firms to identify the overall demand within the market, but this can also be used to extract greater amounts of surplus through forms of price discrimination.

Steven Proud is reader of economics education at the University of Bristol and a member of the ECONOMIC REVIEW editorial board.